Intro - Chptr 4/Supply&Demand

Question 1

Law of demand:

Answer 1

States that the quantity of a good demanded is inversely related to the good’s price, other things constant. Demand increases as price decreases; demand decreases as price increases. Thus, slope of a demand curve is negative.

Question 2

What is a demand curve?

Answer 2

Graphical representation of the relationship between price & QUANTITY demanded.

Question 3

Define QUANTITY demanded:

Answer 3

Refers to a specific amount that will be demanded per unit of time at a specific price, other variables remaining constant.

Question 4

“Movement” along a demand curve?

Answer 4

Graphical representation of the effect of a change in price on QUANTITY DEMANDED.

Question 5

“Shift” in demand curve?

Answer 5

Graphical representation of the effect of anything other than price on DEMAND.

Question 6

What are the shift factors in demand (5)?

Answer 6

(1) Society’s income; (2) prices of other goods; (3) tastes; (4) expectations; (5) taxes & subsidies to consumers.

Question 7

Market demand curve?

Answer 7

Horizontal sum of all individual demand curves- thus, it will be flatter than individual curves.
INSERT IMAGE

Question 8

For the market, the law of demand is based on what two phenomena?

Answer 8

(1) At lower prices, existing demanders buy more.
(2) At lower prices, new demanders enter the market.
Based on OC & substitution, i.e. as price increases the OC increases and quantity demanded will decrease as consumers substitute another product/service.

Question 9

What are six things to remember about a demand curve?

Answer 9

(1) demand curve follows the law of demand; (2) horizontal axis- quantity- has a time dimension; (3) quality of each unit is the same; (4) vertical axis- price- assumes all other prices remain the same; (5) curve assumes everything else is held constant; (6) effects of price changes result in MOVEMENT along the demand curve while effects of nonprice determinants on demand result in SHIFTS of the entire demand curve.

Question 10

Law of supply?

Answer 10

Quantity supplied rises as price rises, other things constant.
Quantity supplied falls as price falls, other things constant.
Thus, slope of supply curve is positive.

Question 11

What is the law of supply based on?

Answer 11

Law of supply is based on substitution (a firm’s ability to substitute production of one good for another good) and the expectation of profits. A firm wants to supply more because the OC of NOT producing the goods rises as its price rises.
(1) at higher prices, existing suppliers supply more; (2) at higher prices, new suppliers enter the market.

Question 12

What is a supply curve?

Answer 12

Graphical representation of the relationship between price and QUANTITY supplied.

Question 13

What is “demand”?

Answer 13

Refers to the schedule of quantities of a good that will be bought per unit of time at various prices, other things constant.

Question 14

What is “supply”?

Answer 14

Refers to the schedule of quantities a seller is willing to sell per unit of time at various prices, other things constant.

Question 15

Define QUANTITY supplied:

Answer 15

Refers to a specific amount that will be supplied per unit of time at a specific price, other things constant.

Question 16

“Movement” along a supply curve?

Answer 16

Graphical representation of the effect a change in price has on QUANTITY supplied.

Question 17

“Shift” in a supply curve?

Answer 17

Graphical representation of the effect a change in a factor other than price has on SUPPLY.

Question 18

What are the shift factors of supply (4)?

Answer 18

(1) Prices of inputs; (2) technology; (3) expectations, e.g. if supplier expects prices to increase in future may store current output to sell in the future; (4) taxes and subsidies- taxes increase cost of production which reduces supply while subsidies decrease cost of production which increases supply.

Question 19

What is a market supply curve?

Answer 19

The horizontal sum of all individual supply curves. INSERT IMAGE.

Question 20

What are six things to remember about a supply curve?

Answer 20

(1) A supply curve follows the law of supply; (2) horizontal axis- quantity- has a time dimension; (3) quality of each unit is the same; (4) vertical axis- price- assumes all other prices remain constant; (5) curve assumes everything else is constant; (6) effects of price changes are shown as MOVEMENT along the supply curve while effects of nonprice determinants of supply result in SHIFTS of the entire supply curve.

Question 21

What is equilibrium?

Answer 21

Equilibrium: Concept in which opposing dynamic forces cancel each other out.
Equilibrium price: the price toward which the invisible hand drives the market. Equilibrium quantity: the amount bought & sold at the equilibrium price.

Question 22

Describe two things equilibrium is NOT:

Answer 22

(1) It isn’t a state of the world- rather it’s a characteristic of the model- the framework you use to look at the world. e.g. framework of a speeding car relative to another speeding car vs. framework of a speeding car relative to landscape.
(2) It isn’t inherently good or bad; it’s simply a state in which dynamic pressures offset each other.

Question 23

Excess supply?

Answer 23

Surplus- quantity supplied is greater than quantity demanded.

Question 24

Excess demand?

Answer 24

Shortage- Quantity demanded is greater than quantity supplied.

Question 25

Describe “price adjusts.”

Answer 25

Prices tend to rise when there is excess demand (shortage) and prices tend to fall when there is excess supply (surplus). Also, (1) the greater the difference between quantity supplied and quantity demanded, the more pressure there is for prices to rise or fall and (2) when quantity demanded = quantity supplied, market is in equilibrium.

Question 26

PLACEHOLDER: Interaction of supply and demand.

Answer 26

PLACE HOLDER FOR IMAGE.

Question 27

Fallacy of composition?

Answer 27

The false assumption that what is true for a part will also be true for the whole. This concept is central to macroeconomics- in macro, the “other-things-constant” assumption central to microeconomic supply/demand analysis cannot hold.